Types of Financial Engineering
There are broadly two types of financial engineering that encompass several forms of trading and which require thorough market analysis and forecasting, Derivative Trading and Foreign Market Exchange Trading.
1. Derivative Trading
This trading was developed when financial engineers were targeting to maximise company profit by formulating new strategies. It is still now understood that financial engineering implements simulations, stochastics and analytics to formulate solutions to financial problems. But this trading is not a solution rather are agreement which has no monetary value. These financial agreements are related to assets, interest rates or indexes and the value of these derivatives depends on the performance of the underlying asset or commodity with time. In 1973, two financial engineers Fischer Black and Myron Scholes designed their option pricing model and at the same time, CBOE Option Exchange was formed. From then, trading in the derivative market grew exponentially. Traditionally option strategy comprises call and put options. But thanks to the financial engineers who have developed the latest strategies within the options range which would reap more chances to hedge or make profits.
2. Foreign Market Exchange Trading
This type of trading is beneficial in the global markets and the financial engineers utilise this market to maximise company profit. The forex market is dominated by currency exchange rates and thus, the companies hold on to different forms of foreign currencies from different regions. The engineers predict the foreign exchange rates whether they will rise or decline, and depending on this prediction, related brokers trade in the forex market to maximise profit and minimise loss.